The Bright Side of Financial Constraint on Corporate Innovation: Evidence from the Chinese Bond Market

• Published in: Finance research letters Vol. 49; p. 103098
• Main Authors: Lin, Xiaowei, Zhang, Qihao, Chen, Aihua, Zhang, Pengdong
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.10.2022
• Subjects: Corporate Innovation; Financial constraints; Innovative efficiency; Innovative efficiency; Financial constraints; Corporate Innovation
• ISSN: 1544-6123; 1544-6131
• DOI: 10.1016/j.frl.2022.103098

•This paper provides evidence supporting the positive effect of financial constraints on firms’ innovation outputs, using the break of rigid payment in the Chinese bond market as a shock to financial constraints.•To illustrate the underlying mechanisms, we verify that financial constraints can improve firms’ innovative efficiency, both from the perspective of researchers and R&D investments.•Further, the basic effect is more pronounced when the supply of researchers is abundant and when the agency problem in utilizing capital is severe.•We document the positive correlation between breaking rigid payment and financial constraints, to support the validity of the setting. This paper provides evidence supporting the positive effect of financial constraints on firms’ innovation outputs, using the break of rigid payment in the Chinese bond market as a shock to financial constraints. To illustrate the underlying mechanisms, we verify that financial constraints can improve firms’ innovative efficiency, both from the perspective of researchers and R&D investments. Further, the basic effect is more pronounced when the supply of researchers is abundant and when the agency problem in utilizing capital is severe. We document the positive correlation between breaking rigid payment and financial constraints, to support the validity of the setting.